A short sale of a home is when a home sells for less than the amount needed to pay off the mortgage. In a short sale, the lender agrees to accept the lower sales price as payment in full for the remaining mortgage balance. For example, if someone owes $150,000 on mortgage and is falling behind on payments, the bank might agree to take $135,000 as payment for the mortgage.

Advantages of a Short Sale

With a short sale, the borrower benefits because the bank takes less than the borrower owes on the mortgage. So, if you can get a bank to agree to a short sale, you’re being let off the hook for a portion of your debt. So why would a lender agree to a short sale? Foreclosing on a home can be a long, and sometimes costly, process for a lender. So, even though the lender is accepting less than it’s owed, the lender may be receiving more than it would after considering the costs of going through a full foreclosure.

Time Frame

A short sale can take longer to close than a normal home sale because some or all of the parties aren’t being paid everything they’re owed. Nobody wants to lose money, so it can sometimes take a long time for a deal to close, notes Bankrate.com. Worse, short sales can fall through if any of the parties that are owed money aren’t on board. For example, if the seller has a home equity line of credit on top of the mortgage, the home equity lender not agreeing to the short sale could prevent the deal from going through.

Credit Score Impact

Depending on how the transaction is reported, a short sale could have a smaller negative impact on the seller’s credit score than having a full foreclosure, according to Freddie Mac. The damage is minimized if the bank reports the debt as paid in full rather than as a charge off.

Buying a Short Sale Home

Before a lender signs off on a short sale, it requires proof that the borrower doesn’t have any other assets — even retirement accounts. In addition, if you’re buying a short sale home, low ball offers — offers far below the fair market value — are unlikely to be accepted. Lenders want proof that the home won’t be sold for the mortgage amount in the foreseeable future. Finally, whether you’re the seller or the buyer in a short-sale transaction, be prepared to wait, especially if there are multiple parties owed money. If they won’t negotiate, Bankrate.com suggests being prepared to walk away.